Portfolios and CAPM: Stocks, Bonds and Gold


Kerry Back

BUSI 721, Fall 2022
JGSB, Rice University

Let’s calculate optimal portfolios for stocks, treasury bonds, corporate bonds, and gold based on historical means and covariances.

We’ll look at indices from 1968 and ETFS from 2004.

Invest in Treasuries?

  • An important fact is that the correlation between Treasuries and stocks (and corporates) was positive in the last century and has been strongly negative in this century.
  • inflation shocks \(\rightarrow\) positive correlation
  • macro crisis shocks \(\rightarrow\) negative correlation
  • Treasuries are a good investment if they hedge stocks (and corporates) but a bad investment otherwise (due to low average returns).
  • So last century data ⇒ short Treasuries
  • This century data ⇒ large Treasury investments

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